A pay day every day

The ‘future of payroll’ is a topic we hear a lot about at the moment. One aspect which is often part of these discussions is the potential demise of the regular pay-day and a move to people being paid as, and when, they wish. If it becomes commonplace, this trend could eventually alter the face of payroll significantly.

Of course, scenarios in which employees are advanced money before their normal pay-day have been around for ever. However, such advances have traditionally been occasional affairs, with an employer advancing funds to an employee who finds him- or herself with an unexpected financial commitment. What is being discussed these days is very different, because employees would have the right to ask for funds whenever they chose, rather than needing to make a case to their employer every time.

One move towards this is allowing employees to choose their payment frequency, so people could perhaps opt to be paid weekly or fortnightly rather than monthly. Under these arrangements, you simply operate multiple payrolls at whatever frequencies you decide, allowing employees to opt into whichever payroll they wish. However, once they’ve chosen a payroll the employees are then paid on a regular cycle with a regular pay-day within their chosen frequency. This arrangement gives some flexibility but still retains the concept of a regular pay day.

...employees would have the right to ask for funds whenever they chose...

More flexible still is a move towards allowing employees to request advances as and when they choose rather than these only being available as an exception. Drawbacks of this are that even if the payroll system supports it this process can be cumbersome for the employer to administer and has cash flow implications. However, there are a number of companies in the marketplace which will handle this on behalf of the employer. Typically, employees request advances from the third party (within limits set by the employer) using an internet portal, the third party pays them via faster payments and the advance is then deducted from net pay on the next regular pay-day and paid to the third party, along with a small transaction fee (paid by the employee not the employer). These schemes are often marketed on the basis that they help prevent hard-up employees being forced to take out high-interest short-term loans or getting into the clutches of their friendly local loan shark.

Ultimately, though, if fully flexible ‘draw down’ arrangements are to become commonplace, employers will need to support the process themselves rather than relying on third parties. Changes in payment technology, especially the arrival of ‘faster payments’ have made this kind of arrangement much more practical than before, simply by removing the BACS processing cycle from the picture. Many payroll systems can already handle additional pay runs outside the normal cycle, making the processing of advances easier. It’s not yet the simple, automated process which it will need to become in order to make it cost-effective, but things are moving in the right direction.

Which brings us on to the thorny subject of legislation! Pay as you earn dates to a time when this kind of payment flexibility simply never happened. The processes are therefore firmly rooted in the concept of a single payday on a regular cycle, be it weekly, monthly or whatever.

Currently, advances are often treated as loans against net pay, so they’re recovered from net pay at the end of the period and tax etc are calculated as normal on the total gross pay. This achieves the right outcome but means that people only pay their tax and National Insurance contributions at the end of the period. But what happens if someone works two weeks, claims payment for those weeks and then leaves so there’s never a final payment to take the tax from?

You can get around this by calculating tax etc on each payment, treating each as an additional payment in the tax period. This again achieves the right answer overall, but the tax- and NICs-free pay are eaten up by the payments made early in the month and the final payments are therefore disproportionately reduced, which could cause the employee difficulties if they don’t realise this is going to happen.

There’s also the possibility that HM Revenue & Customs will have something to say if draw-down payments become commonplace. There must surely be a point at which people become ‘irregularly paid’ if they’re nominally paid monthly but, in reality, have always received several payments by the time the end of the month comes around.

So, this is a case where both payroll systems and legislation will probably have to change to keep up with a change to the employer/employee relationship.